This is in response to your letter requesting an
advisory opinion under the Employee Retirement Income Security Act
of 1974, as amended (ERISA). In particular, you request an opinion
that the provision of trustee services by Laurel Trust Company
(Laurel) to two defined benefit pension plans sponsored by Laurel
(the Plans), and the payment by the Plans of Laurel’s standard
trustee fees would be exempt from ERISA’s prohibited transaction
provisions by reason of section 408(b)(6) of ERISA.(1)

Your letter contains the following
representations. Laurel provided trustee services to the Plans and
charged its customary trustee fees for such services. Laurel
assumed that the provision of such services and the receipt of the
fees was exempted from the prohibited transactions provisions of
section 406 of ERISA by reason of section 408(b)(6). You represent
that in 1996, the Department of Labor (the Department) determined
that this arrangement constituted a violation of section 406 of
ERISA and imposed on Laurel (then known as BT Management Trust
Company) a civil penalty under section 502(l) of ERISA. Laurel
petitioned the Department for a waiver or reduction of the civil
penalty, which was denied. Laurel paid the civil penalty and ceased
charging its customary fees to the Plans. Citing a 1993 IRS Field
Service Advice Memorandum, which you believe takes a view contrary
to that of the Department, you have requested that the Department
reconsider its position with respect to section 408(b)(6) of ERISA.

Laurel contends that section 406 of ERISA does
not prohibit the Plans from paying Laurel its customary trustee
fees, which are the same fees paid by plans sponsored by parties
unrelated to Laurel. You represent that such fees represent
reasonable compensation for services, which plans are permitted to
pay, even if those fees include a profit component. You recognize
that ERISA section 406 would otherwise prohibit the payment of such
fees, but claim that the statutory exemption provided by section
408(b)(6) permits the payment of the fees by the Plans to Laurel.

Section 406(a)(1)(C) and (D) of ERISA provides
that a fiduciary with respect to a plan shall not cause the plan to
engage in a transaction, if the fiduciary knows or should know that
such transaction constitutes a direct or indirect furnishing of
goods, services, or facilities between the plan and a party in
interest or a transfer to, or use by or for the benefit of, a party
in interest, of any assets of the plan. Section 406(b)(1) of ERISA
provides that a fiduciary with respect to a plan shall not deal
with plan assets in his own interest or for his own account.
Section 406(b)(2) of ERISA prohibits a fiduciary with respect to a
plan from acting in any transaction involving the plan on behalf of
a party, or represent a party, whose interests are adverse to the
interests of the plan or of its participants and beneficiaries.

Section 408(b)(6) of ERISA provides that the
prohibitions of section 406 shall not apply to the provision of any
ancillary service by a bank or similar financial institution
supervised by the United States or a State, if such bank or
financial institution is a fiduciary of such plan, provided that
certain conditions are satisfied.

You represent that Laurel, as a Pennsylvania
state-chartered trust company, is a “bank or similar financial
institution” that is supervised by a State. You further represent
that the provision of services to and payment of fees by the Plans
satisfies the other conditions of ERISA section 408(b)(6).

You claim that the Department has previously
concluded that a plan’s payment of fees that include a profit
component is not “reasonable compensation,” as that term is
used in both section 408(b)(2) and 408(b)(6) of ERISA. You further
claim that the Internal Revenue Service (IRS) has taken a contrary
position with respect to section 4975(d)(6) of the Internal Revenue
Code of 1986 (the Code), a parallel provision to ERISA section
408(b)(6), in a 1993 Field Service Advice Memorandum (Memorandum),
a copy of which you included with your letter. Pursuant to section
102 of Reorganization Plan No. 4 of 1978 (see, footnote 1, above),
all authority to issue regulations, rulings, interpretations, and
exemptions under section 4975(d) of the Code, with exceptions not
here relevant, was transferred to the Department. The Department,
therefore, has sole authority and responsibility to interpret
section 4975(d)(6) of the Code.

Section 408(b)(6) of ERISA (and by reference,
section 4975(d)(6) of the Code, see, footnote 1, above) exempts
from the prohibited transaction provisions of ERISA the provision
of “ancillary” services to a plan by a fiduciary that is a bank
or similar financial institution supervised by the United States or
a State and the payment of no more than “reasonable
compensation” by the plan. It is the opinion of the Department
that trustee services are not ancillary services.

Trustee services are necessary and essential to
the establishment, maintenance, and operation of a pension plan
that is subject to ERISA. Section 403(a) of ERISA requires that,
subject to several exceptions not relevant here, all assets of an
employee benefit plan shall be held in trust by one or more
trustees. The trustee or trustees shall have exclusive authority
and discretion to manage and control the assets of the plan, except
to the extent that the plan expressly provides that the trustee or
trustees are subject to the direction of a named fiduciary who is
not a trustee, in which case the trustees shall be subject to
proper directions of such fiduciary which are made in accordance
with the terms of the plan and which are not contrary to ERISA, or
to the extent that authority to manage, acquire, or dispose of
assets of the plan is delegated to one or more investment managers.
In the Department’s view a service is “ancillary” if it aids
or is auxiliary to a primary or principal service. For instance,
the Department has stated that the provision of “sweep
services” by a trustee who is subject to direction from an
independent investment manager for the investment of plan assets,
may constitute an “ancillary service” within the meaning of
section 408(b)(6).(2) Given the
central role that the establishment of a trust and the naming of a
trustee plays in the establishment, maintenance, and operation of
an employee benefit plan, the Department concludes that trustee
services cannot be “ancillary services” within the meaning of
ERISA section 408(b)(6).

Section 408(b)(2) of ERISA exempts from the
prohibitions of section 406(a) any contract or reasonable
arrangement with a party in interest, including a fiduciary, for
office space, or legal, accounting or other services necessary for
the establishment or operation of the plan, if no more than
reasonable compensation is paid therefore. Regulations issued by
the Department clarify the terms "necessary service" (29
CFR §2550.408b-2(b)), "reasonable contract or
arrangement" (29 CFR §2550.408b-2(c)) and "reasonable
compensation" (29 CFR §2550.408b-2(d) and 2550.408c-2) as
used in section 408(b)(2). As a general matter, whether the
requirements of that section are met in each case involves
questions which are inherently factual in nature. Pursuant to
section 5.01 of ERISA Procedure 76-1, the Department ordinarily
does not issue opinions on such matters. The Department has not
concluded, however, that fees including a profit component
necessarily exceed reasonable compensation.

With respect to the prohibitions in section
406(b), the regulation under section 408(b)(2) of ERISA (29 CFR §2550.408b-2(a))
states that section 408(b)(2) of ERISA does not contain an
exemption for an act described in section 406(b) even if such act
occurs in connection with a provision of services that is exempt
under section 408(b)(2).

As explained in regulation 29 CFR §2550.408b-2(e)(1),
the prohibitions of section 406(b) are imposed upon fiduciaries to
deter them from exercising the authority, control, or
responsibility that makes them fiduciaries when they have interests
that may conflict with the interests of the plans for which they
act. Thus, a fiduciary may not use the authority, control, or
responsibility that makes him a fiduciary to cause a plan to pay an
additional fee to such fiduciary, or to a person in which he has an
interest that may affect the exercise of his best judgment as a
fiduciary, to provide a service. However, regulation 29 CFR §2550.408b-2(e)(2)
provides that a fiduciary does not engage in an act described in
section 406(b)(1) of ERISA if the fiduciary does not use any of the
authority, control, or responsibility that makes him a fiduciary to
cause a plan to pay additional fees for a service furnished by such
fiduciary or to pay a fee for a service furnished by a person in
which the fiduciary has an interest that may affect the exercise of
his judgment as a fiduciary. Furthermore, regulation section
2550.408b-2(e)(3) explains that if a fiduciary provides services to
a plan without the receipt of compensation or other consideration
other than the reimbursement of direct expenses properly and
actually incurred in the performance of such services, the
provision of such services does not, in and of itself, constitute
an act described in section 406(b) of ERISA. Regulation section
2550.408c-2(b)(3) provides that an expense is not a direct expense
to the extent that it would have been sustained had the service not
been provided or if it represents an allocable portion of overhead.

Accordingly, it is the opinion of the Department
that if Laurel provides trustee services to the Plans and charges
the Plans a fee that exceeds the direct expenses that Laurel incurs
in the provision of trustee services to the Plans, it would engage
in violations of ERISA section 406(b)(1) and (2), which would not
be exempted by ERISA section 408(b)(2) or (6).

This letter constitutes an advisory opinion
under ERISA Procedure 76-1 (41 Fed. Reg. 36281, August 27, 1976).
Accordingly, this letter is issued subject to the provisions of the
procedure, including section 10 relating to the effect of advisory
opinions.

Under Reorganization Plan No. 4
of 1978 (43 FR 47713, October 17, 1978), 5 U.S.C. App.1, 92 Stat.
3790, the authority of the Secretary of the Treasury to issue
rulings under section 4975 of the Code has been transferred, with
certain exceptions not here relevant, to the Secretary of Labor.
Therefore, the references in this letter to specific sections of
ERISA should be taken as referring also to the corresponding
sections of the Code.

See, letter from Alan D.
Lebowitz to Robert S. Plotkin, Assistant Director, Division of
Banking Supervision and Regulation, Board of Governors of the
Federal Reserve System, August 1, 1986.